In its New Markets Tax Credit 2012 Application Q & A issued last week the CDFI Fund identified those states receiving fewer New Markets Tax Credit proceeds in proportion to its state population. The CDFI Fund indicated that the deployment of New Markets Tax Credit proceeds to these underserved states would be considered an innovative us of New Markets Tax Credit Allocation and favored by the CDFI Fund. Since the inception of the New Markets Tax Credit Program, “qualified low-income community investments” have been made in all 50 states, the District of Columbia, and Puerto Rico. However, the CDFI Fund has identified Puerto Rico, along with the following 10 states, as areas that have received fewer dollars of “qualified low-income community investments” in proportion to their statewide population residing in Low-Income Communities: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, and West Virginia. The CDFI Fund also considers the Island Areas of the United States (American Samoa, Guam, Northern Mariana Islands, and the U. S. Virgin Islands) to have received lower levers of NMTC investment, as these four territories have not received any “qualified low-income community investments.”
The CDFI Fund recently issued a New Markets Tax Credit 2012 Application Q and A. Contained within this document is guidance provided by the CDFI Fund as a result of two conference calls held on July 24th and July 26th 2012 for potential 2012 Round New Markets Tax Credit allocation applicants. The participants on these calls asked for additional clarification on specific questions within the application to which the New Markets Tax Credit Program team responded. Additional guidance and clarification is provided in the Q and A with respect to what the CDFI Fund considers as innovative uses of NMTCs which includes but is not limited to: investing in Unrelated CDEs that do not have a NMTC Allocation; targeting states identified by the CDFI Fund as having received fewer dollars of QLICIs; providing QLICIs in amounts of $2 million or less; revolving QLICIs to serve more QALICBs; and providing non-real estate financing such as working capital or equipment loans. The CDFI Fund also provided examples of uses of NMTCs that would not be considered innovative which include the use of the leverage structure, combining NMTCs with historic tax credits, and investments in real estate (either to real estate QALICBs or non-real estate QALICBs) in states other than the 10 states and territories identified in the Application Q&A.
Senate Finance Committee Chairman Max Baucus (D-Mont.) released a summary of the Family and Business Tax Cut Certainty Act of 2012, as approved by the Senate Finance Committee. The Senate Finance Committee approved a package of more than $205 billion in tax cut extensions for families and businesses by a bipartisan vote of 19-5. The Bill, once finalized, will be posted on the Committee’s legislation website. The summary of the proposed Family and Business Tax Cut Certainty Act of 2012 describes an extension of the Federal New Markets Tax Credit Program for two additional years at $3.5 billion dollars of New Markets Tax Credit allocation each year.
The New Jersey Urban Transit Tax Credit Program provides an average incentive to a company of $167,000 for every job created in or saved from leaving the state. The tax credit is for projects of $50 million or more within a half mile to one mile radius of transportation centers in nine cities such as Camden, Newark, Jersey City, Hoboken, Elizabeth, Paterson, East Orange and Trenton. The development’s “multiplier effect” of new employment and commerce must generate 10% more in new tax revenue than the amount of the tax credit. Residential projects do not have to have the same job creation effect, but they also do not qualify for as generous a subsidy.
The program started small, with state officials estimating that only a few businesses would qualify, but it has expanded into the state’s most important business incentive program. Since 2010, 18 residential, commercial and mixed-use projects have been awarded $977 million under the program. The recipients have pledged to invest $2.1 billion, create 2,910 jobs and retain 2,935 others deemed at risk of moving out of state.
On August 2nd the Senate Finance Committee voted to renew the wind power production tax credit that is set to expire at the end of this year with the proposed Wind Powering America Jobs Act. The bill is expected to go to the Senate floor when Congress returns from summer recess. Wind farms can generally choose to receive a continuing credit of 2.2 cents per kilowatt-hour of electricity produced or receive a one-time payment equivalent to 30 percent of the cost of developing a project. Currently the production tax credit and the option to elect the 30 percent renewable energy investment tax credit will expire at the end of 2012. In contract, the renewable energy investment tax credit for solar projects will continue through the end of 2016. However, it is unclear if the House will support a renewal of the wind production tax credit.
The expiration of the Section 1603 grant in lieu of the federal renewable energy tax credit has had a substantial adverse impact on the development of renewable energy projects in the Country. While some projects were able to grandfather the benefits of the Section 1603 grant by incurring the required costs in 2011, these projects will disappear during the year. In addition, although the grant provides money in lieu of the tax credit it does not monetize the losses associated with the project which most developers do not have the taxable income to use. As a result, less equity is generated for these projects. Historically the renewable tax credit investment community has serviced the very large utility size projects and not the middle market. Duane Morris attorneys are working with investors in the low-income housing, historic, and new markets tax credit industries to educate these investors to the structures and opportunities available for middle market renewable energy tax credit transactions. It is hoped that in the near future a group of investors will emerge to service middle market renewable energy tax credit transactions.
On June 30, Pennsylvania became the 30th state in the Country to have a state historic tax credit with the passage of the Pennsylvania Historic Preservation Incentive Act. The Act will provide a 25% state tax credit for the rehabilitation of qualified income-producing buildings that also use the federal historic tax credit. The State tax credit will be equal to 25% of the “qualified expenditures” (as defined under Section 47(c)(2) of the Internal Revenue Code) incurred by the taxpayer. In order to qualify projects must be commercial in nature. To qualify as a historic structure, the building must be listed in the National Register of Historic Places or be part of a historic district listed in the National Register. The “qualified rehabilitation plan” itself must also be approved by the Pennsylvania Historical and Museum Commission, as reviewed against the Secretary of the Interior’s Standards and Guidelines of Rehabilitation. The Pennsylvania historic tax credit program is limited to $3,000,000 annually with an individual project cap of $500,000. The Pennsylvania Historical and Museum Commission and the Department of Economic Development will develop the program guidelines. The credit goes into effect July 1, 2012 but the first tax credits will not be issued until after July 1, 2013.
The U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) released today its 2012 Notice of Allocation Availability (NOAA) which officially opens the 2012 round of competition under the New Markets Tax Credit Program (NMTC Program). $5 billion in New Markets Tax Credit authority will be allocated by the CDFI Fund in the 2012 round, pending Congressional authorization. The CDFI Fund also announced September 12, 2012 as the deadline for the submission of an application for New Markets Tax Credit authority and October 31, 2012 as the deadline for issuance by prior allocatees of New Markets Tax Credit authority of qualified equity investments in the amounts required in the NOAA.
Since the inception of the Federal New Markets Tax Credit program, the industry has evolved from the traditional phase of understanding how to use the program, to the tax credit investors driving the transaction, to most recently the community development entities with allocation controlling the benefits of the program. As a result of the scarcity of New Markets Tax Credit allocation, the historic equity benefit generated to the sponsors of projects has slowly diminshed. In contrast during the recent Duane Morris Real Estate and Finance Reception the guest speaker Bill Hankowsky described the extremely favorable terms of market rate financing for those borrowers in the “fairway”, e.g. meet the current underwriting criteria of conventional lenders. As a result, there is a diminishing gap between the cost of New Markets Tax credit subsidized financing and market rate financing for those sponsors who are in the “fairway”. Sponsors should consider whether they fall within the “fairway” of conventional financing when developing the capital stack of a project.
With the expiration of the legislation which provided the 1603 grant in lieu of the energy investment tax credit, renewable energy developers must now “sell” the investment tax credit to a tax credit investor. Recapture of the investment tax credit to a tax credit investor occurs if the energy property is foreclosed by a lender during the 5 year tax credit compliance period. As a result, tax credit investors routinely require a lender to forbear exercising its rights against a borrower during the 5 year tax credit compliance period to avoid recapture of the investment tax credit. Obviously forbearance is contrary to the goals of a lender which wants the right to exercise any and all remedies in the event of a default by the owner of the energy property. As a result of the stress between the positions of the tax credit investor and the lender a variety of alternatives to absolute forbearance have evolved. These alternatives include limiting forbearance to solely the energy property, providing the lender with a security interest in the equity interests of the borrower and permitting the lender to exercise its pledge of the equity interests of the borrower, and the exercise of rights against the energy property only in the event of a major default and after notice and an opportunity to cure to the tax credit investor as well as providing the tax credit investor with a purchase right of the energy property. The syndication of the energy investment tax credit to the tax credit investor creates a conflict between the interests of the investor and the lender which can only be resolved by a negotiated forbearance agreement between the parties.